Fed officials struggle to chart economy’s course


Federal Reserve Chairman Ben Bernanke speaks to guests at a banking conference hosted by the Federal Reserve Bank of Chicago on May 10. (Scott Olson/Getty Images)
May 16, 2013

Federal Reserve officials are grappling with how to decipher the economy’s mixed signals and what to do with the central bank’s multibillion-dollar stimulus effort.

The past two days have brought an unusual but uncoordinated flurry of speeches by the central bank’s top brass. Six Fed officials outlined diverse — and sometimes opposing — interpretations of the direction of the recovery and the appropriate response.

Four of them called on the central bank to pull back on its monthly $85 billion bond-buying program intended to lower long-term interest rates. The Fed hopes the program will boost consumer and business demand and has tied it to the health of the labor market.

Speaking in Portland, Ore., San Francisco Fed President John Williams forecast that the unemployment rate will fall below 7.5 percent by the end of the year as economic growth picks up. He argued that the Fed should start tapering the amount of its purchases as soon as this summer and end the program by 2014.

“There is indeed little doubt that the economy is on the mend,” Williams said.

Williams’s public remarks often carry particular weight because he is viewed as close to Fed Chairman Ben S. Bernanke and Vice Chairwoman Janet L. Yellen. His timeline for tapering has not changed since his speech last month in Los Angeles despite a slowdown in job creation.

Philadelphia Fed President Charles I. Plosser advocated a similar plan in two speeches this week, though for different reasons.

Plosser opposed the latest round of bond purchases and urged the Fed to scale back quickly to avoid distorting the marketplace. He noted that job growth has averaged more than 200,000 over the past six months — an informal benchmark in the recovery. Now, Williams said, the danger is that the Fed won’t move fast enough to reverse its easy-money policies, undermining its credibility.

Dallas Fed President Richard Fisher made the case Thursday that the Fed has reaped the maximum possible benefits from its bond purchases, and he is ready to call it quits. In particular, he said the Fed should slow down its monthly $40 billion purchases of mortgage-backed securities and end them altogether by December.

“I think we can rightly declare victory on the housing front,” Fisher said.

But Richmond Fed President Jeffrey M. Lacker said the Fed shouldn’t have to wait that long. Lacker has become known for his contrarian positions, dissenting from every vote when he was a member of the Fed’s policymaking committee last year. Though other officials have proposed scaling back purchases before halting the program, he told reporters on Wednesday in Baltimore that he supports stopping cold turkey.

“I know it’s not the leading alternative,” he said. But, he said, “I don’t see why not.”

Meanwhile, one Fed official on Thursday said the central bank’s policies may not be easy enough. Boston Fed President Eric S. Rosengren noted that the Fed is far from its goals of lowering unemployment to at least 6.5 percent while keeping inflation no higher than 2.5 percent. He has a vote on the Fed’s policymaking committee this year.

In an interview last month, Rosengren said he might consider tapering the amount of bond purchases during the second half of the year but said that the program is likely to continue into 2014. He also broached the possibility of increasing bond purchases in the unlikely event that the recovery falls apart.

That idea was reinforced in the Fed’s most recent policy statement, which for the first time explicitly stated that the Fed could “increase or decrease” purchases. Even Plosser noted in his speeches that the Fed could dial up or dial down its bond-buying, depending on economic conditions. He also stressed that the Fed may take one step and then pause while it reassesses the situation. Fed Governor Sarah Bloom Raskin on Thursday said the central bank would “calibrate” the purchases.

There was one common thread in officials’ remarks this week: the role Washington has played in holding back economic growth.

The title of Fisher’s speech was “Fiscal Policy. Oy!” Rosengren noted that, historically, governments have increased spending during recessions. Lacker minced no words in blaming Congress for slower growth.

“Frankly, I think the situation here is a mess,” he said during a speech in Baltimore late Wednesday. “I’ll say that straight out.”

The uncertainty surrounding fiscal policy and the impact of the $800 billion spending cuts known as the sequester could persuade the Fed to stay the course on bond-buying for a little while longer, said Isaac Boltansky, vice president and policy analyst at Compass Point Research and Trading. He predicted that the Fed would not reduce it purchases until the fall.

“The Federal Reserve will continue to take into account the nation’s restrictive fiscal policies when considering the eventual exit from extraordinary monetary policies,” he said.

Bernanke is scheduled to cap off the week with a commencement speech Saturday on the country’s long-run economic prospects.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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